How could the new employee shareholder status affect your business?

The new "Employee Shareholder" status is due to be implemented in September 2013 through the Growth and Infrastructure Act 2013. The new status, designed to encourage employees to become shareholders in their employer, will allow certain employment rights to be exchanged for shares worth at least £2,000. Any gains on the first £50,000 of shares issued will be exempt from capital gains tax.

The key terms applicable to the scheme are that:

  • Employee Shareholders would not have the right to: Unfair dismissal rights (except for reasons that are automatically unfair or that relate to discrimination); Statutory redundancy pay; Request flexible working and time to train. 
  • Employee shareholders would have to give a minimum of 16 weeks’ notice of the intention to return early from maternity, adoption and paternity leave.
  • The individual must have received independent legal advice prior to entering into an employee shareholder contract. Without the legal advice the employee will be an ordinary employee. Employers will be liable to pay the legal costs. 
  • There will be a seven day 'cooling off' period during which time the employee can change their mind on their acceptance of the employee shareholder contract.
  • Current employees must not suffer a detriment for their refusal to change to an employee shareholder contract. 
  • Jobseekers will not be deprived of their unemployment benefits if they refuse an employee shareholder contract.
  • Employers must provide detailed information to the individual with details of the shares and the rights they will have.

What is the likely impact?

Companies such as John Lewis have, for some time, allowed employees to have a stake in the ownership of the business. The aim of the new legislation is to improve productivity and profitability whilst also providing some legal certainty for employers against employment litigation (although what the response of the tribunals will be remains to be seen).

Employers will need to consider how they will value the shares at the time an Employee Shareholder offer is made. The government appears reluctant to over-regulate exactly how the share element should work.  Employers may want to consider putting a process in place to deal with the valuation of shares at the time an offer is made. Such a process should perhaps include as a minimum:

  • Board meeting and minutes approving the valuation of the company and the shares;
  • Independent evaluation/audited accounts (depending on the size of the business and shares being offered);
  • An appropriate paper trail detailing how the shares were valued.

This documentation should be retained for future reference.

Thought will need to be given to the Company’s articles so that shares can be acquired from outgoing employees. "Good leaver" and "bad leaver" provisions and the potential impact they may have on the value of the shares when an Employee Shareholder departs will also need to be considered. Under these rights, differing values can be attributed to shares depending upon whether an employee is classed as a good leaver or a bad leaver. If an employee were to be classed as a bad leaver his or her shares may be worth very little and they may also have no employment protection.

Employers also need to be mindful that a minimum of £2,000 worth of fully paid up shares need to be given to an employee in order for the employee to be classed as an Employee Shareholder and thus trade their employment rights. If the shares are overvalued and are, in reality, worth less than £2,000, it could be that the Employee Shareholder gains both the shares and full employment protection. Employers will need to be cautious in this regard.

In summary

For now we will have to wait and see how popular the Employee Shareholder status proves to be. Undoubtedly the model will suit some employers and, once the various issues are ironed out, we will see how many employers (and employees) take this route.

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.

Craig Chaplin

Partner - National Head of Commercial & Competition

I am a Partner and Head of the Commercial & Competition Team.